Francisco's Money Speech -The following is an excerpt from Atlas Shrugged

"So you think that money is the root of all evil?" said Francisco d'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor--your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money, Is this what you consider evil?

"Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions--and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth.

"But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man's capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is made--before it can be looted or mooched--made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.'

"To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit by the unforced judgment of the traders. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss--the recognition that they are not beasts of burden, born to carry the weight of your misery--that you must offer them values, not wounds--that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade--with reason, not force, as their final arbiter--it is the best product that wins, the best performance, the man of best judgment and highest ability--and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?

"But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality--the men who seek to replace the mind by seizing the products of the mind.

"Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he's evaded the knowledge of what to value, and it will not provide him with a purpose, if he's evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason why you call it evil?

"Only the man who does not need it, is fit to inherit wealth--the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason why you call it evil?

"Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men's vices or men's stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment's or a penny's worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you'll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of your hatred of money?

"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money?

"Or did you say it's the love of money that's the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It's the person who would sell his soul for a nickel, who is loudest in proclaiming his hatred of money--and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it.

"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it.

"Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another--their only substitute, if they abandon money, is the muzzle of a gun.

"But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich--will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt--and of his life, as he deserves.

"Then you will see the rise of the men of the double standard--the men who live by force, yet count on those who live by trade to create the value of their looted money--the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law--men who use force to seize the wealth of disarmed victims--then money becomes its creators' avenger. Such looters believe it safe to rob defenseless men, once they've passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter.

"Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.

"You stand in the midst of the greatest achievements of the greatest productive civilization and you wonder why it's crumbling around you, while you're damning its life-blood--money. You look upon money as the savages did before you, and you wonder why the jungle is creeping back to the edge of your cities. Throughout men's history, money was always seized by looters of one brand or another, whose names changed, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about the evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves--slaves who repeated the motions once discovered by somebody's mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer, Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers--as industrialists.

"To the glory of mankind, there was, for the first and only time in history, a country of money--and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man's mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being--the self-made man--the American industrialist.

"If you ask me to name the proudest distinction of Americans, I would choose--because it contains all the others--the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity--to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words 'to make money' hold the essence of human morality.

"Yet these were the words for which Americans were denounced by the rotted cultures of the looters' continents. Now the looters' credo has brought you to regard your proudest achievements as a hallmark of shame, your prosperity as guilt, your greatest men, the industrialists, as blackguards, and your magnificent factories as the product and property of muscular labor, the labor of whip-driven slaves, like the pyramids of Egypt. The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide-- as, I think, he will.

"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns--or dollars. Take your choice--there is no other--and your time is running out."

Oh Zeus where art thou

Word on the street

Greece might be defaulting on their debt- Asking EU for help

If EU (notably Germany, France and Belgium) bails them out... this will send a messasge to the other EU memeber countries that they can be reckless with their money too and when push comes to shove they will be taken care of by EU (other country's tax money). This is not the message EU wants to send out but at the same time if they don't bail out Greece if they need to, another market panic is about to blow effecting both equity and bond market... also taking the value of Euro down the drain.. which wil also cause a panic in the FX market (foreign exchange market) .. So what is EU gonna do.. carefully balance cost and benefit..

This is the third government (almost) defaulting on their bonds since the "Great Recession" (Iceland and Dubai before this)

DOW went down under 1000 today after a long time trading above this level. Los half the money I gained and kept getting stupid margin call from some chick with thick british accent.

Asian Tigers are hungry

The Asian economies were widely blamed for playing their part in the 2008-09 financial crisis that rocked the economies of the developed countries. The blame in simple language was Asian economies consumed less and saved more and with that savings they bought American Treasury Bills helping uncreditworthy Americans to get cheap credit to consume products "Made in Asia". Lets dig a little deeper and get to the bottom of this. What does it really mean? A country's current account surplus is by definition, equal to its domestic saving minus its domestic investment. So asian economies can reduce their surpluses by saving less (ie consuming mroe) or by investing more. It is surprising to find out that from the outside it looks like Asian economies were consuming less but this fact ignores the other side of the equation. Asian economies were also investing less. GDP (fancy word for a countries total income) comprises of C+I+G+NX (consumption, private investment, gov't spending and next export). Since the Asian crisis in the 90s, Investment (I from the equation above) in the emerging Asian economies (Notably- Thailand, Malaysia, Taiwan, Phillipines) has either actually fallen or remaind the same. The reason these countries have large current surpluses is because investment plunged compared to the savings. According to the Economist magazine- Malaysia's investment dropped from 44% of GDP in 1995 to 19% last year. Thailand dropped from 41% to 21% (same time frame). The consumption on the contrary was one of the dominant source for GDP in these countries. Although I suspect the consumption was mostly from the mid to upper class people which is relatively minor in these countries compared to the developed world. These countries actually need to invest more, specially in the infrastructure of the country-lifting the quality of human capital and thereby lifting labor productivity and standard of living. Although its very convinient in the classroom, calculating labor productivity is extremely difficult in real life. But in theory a country should invest until marginal product of capital is maximized (until the benefit of adding addition unit of capital outweigh the cost). By this measure the developing Asian economies has definitely has advantage over already developed world. Since capital is relatively scarce in these countries- the capital stock is much lower than the labor force so the productivity will be higher. What these countries need to do, instead of buying American T bills, invest, invest and invest. China on the other hand can invest and consume both at a large scale. And if you are an investor in the developed world, here is a free advice. Invest in developing world securities (ETF's and Mutual Funds-focusing in these sector)

Asset Bubble - What to look out for

A combination of low interest rate and loose fiscal policy usually creates an asset bubble. What this means is when interest rate in the economy is low, it stimulates the economy from two different ends. First borrowing is cheap so people tend to borrow more. Secondly investors who already have money to invest look elsewhere besides cash and Treasury bills to park their money as the interest rate is too low to generate a lucrative profit or beat inflation. Another scheme investors pull in this kind of scenario is borrow money at a cheaper rate and invest in projects/products generating higher rate expecting to make a profit on the margin. This is usually one of the major reasons why an asset bubble is formed. This cheap borrowing scheme creates artificial demand pulling the price of assets higher than what they should be. The real estate market is one of the major asset division and good indicator of asset bubble. This sector was the victim of this artificial demand mentioned above in the recent economic downturn which finally fell hard witha noisy bust. Although governments around the world has subdued the negative effects of recession, critics of government internvention argue this very government aid is leading the economy to a second crisis by creating artificial demand from low interest rate and extra loose fiscal policy. Lets focus on real estate. The price of real estate has long been used as an indicator of growth in the economy. Why?..it is "real" asset with physical characteristic what everyone likes... as simple as that. so in the aggregate economy when GDP grows (which is the economist's term for national income) demand for asset like real estate generally grows because people has more income. But not all income is proportional to the GDP demand but either ways, if GDP grows by 3% for example lets say for the sake of understanding this article, real estate will grow by 2%. Higher income creates higher demand. Now the problem is when Real estate prices actually go up by 5%. This could be a reason for concern. As it means that a country only produced real income growth of 3% but aggregate price for real estate went up by 5%. So obviously the additional 2% difference is not "right". Leverage is in the play and there could be concerns about an asset bubble (overpricing). Mark Carney and Ben Bernanke (Boss of Bank of Canada and U.S Federal Reserve-institutions responsible for conducting monetary policy) both decided to keep interest rate low as they argued even though the real estate sector has stabilized there are still weaknesses in the other sectors in the economy (export, manufacturing) which will benefit from the current low rate. Second reason is that the output gap in the economy is still wide. Output gap in brief is the gap between a potential GDP with given amount of resource and the actual GDP. Which is wide in both Canada and United States (Wider in United States). This means with all our economic resources we are producing much less then what we should be producing in an optimal level. Which means our economy still needs support. These two men are really smart and so far they have done a great job in combating the recession but in the near future-specially within next 8 to 12 months they will have to put a leash on the interest rate and other means of loose monetary policy to avoid another bubble.

From Business with Love

The current issue of the Economist had an excellent article which addresses the issue that business people are too polite and they should stand up for themselves. I cant help but to extend and summarize some points from that superb article.

Business people are often unfairly called greedy. All the treehuggers and advocates of corporate responsibility suggest Businesses have something to apologise for. They have their reasons. The recent credit crunch almost plunged the world into depression and Bankers played their role. CEOs and top executives pay themselves like kings, many Business titans who sparkled the front covers of Business magazines have been taken to prison for fraud.

The recent credit crunch has been caused by many different factors and bankers shouldnt be the only group blamed. When it comes to fraud, it is unfair to judge the whole kind by the misdeeds of the few. When one plane crashes it doesn't mean the whole airline industry is full of bad planes. In aggregate, Businesses have given more to mankind than it has taken. The defenders of business have two main arguments. First many firms are devoted for good cause. To point out a few- Starbucks promotes fair trade coffee, GAP Red tag promotion to help fight poverty, Glaxosmithklein makes HIV drugs available to millions of Africans at a low cost. The second argument is stronger. Businesses have done more than any other institutions to advance prosperity among human beings- Turning the luxuries of the rich-like cars and computers-into affordable goods for the masses. Walmart help save billions. Business is also a remarkable exercise in co-operation. Shareholders, stakeholders, executives, suppliers, salesman people who never saw each other in real life, work togather towards a common goal. Somebody makes IPOD in China, that same IPOD is sold at Future shop in Toronto, Canada by a salesman with thick Indian accent. Businesses also promotes creativity and invention ---from cell phones that can connect anybody anywhere in this world with live chat view, to affordable medication etc etc. There is also a last huge political reason why businesses are not only good but also a necessity in human society. Anti capitalists argue that companies account for half of the worlds biggest economies. This is not true. According to the economist-Only 202 of the 500 biggest companies in America in 1980 were still in existence 20 years later. Anti capitalist have it upside down- companies actually prevent each other from gaining too much power with competition which additionaly keeps a check to the Government from having too much power. Democratic governments have increased in this world since World war II. Some might say I have outweighed the positives more than the negatives, but from my personal experience people who argue againts businesses (mostly 1st and 2nd year college students) either have miniscule knowledge on how businesses relates to the aggregate marcoeconomy or they have abused statistics and generalize about the whole business kind based on the few outliers. Haters.

Economy update

The Canadian economy grew out of recession by the third quarter of 2009 and the healthy growth momentum is expected to continue in 2010. Strong fundamentals including improved labor market, strong consumer spending, robust real estate and an optimistic business sentiment all played a postive role in lifting up Canada's economy from recession. However its not all good news and some significant challenges still remain for the economy. The growth experienced in 2009 was largely due to the expansionary fiscal and monetary policy (fiscal stimulus and low interes rate) and concerns still remain about the reaction in the economy when the government support expires. Secondly the slowdown in the American economy along with high loonie value will cause downward pressure in the export sector. TD economics (A think tank) is forecasting a 2.7% growth in 2010 and the growth is expected to continue until 2011.

The biggest contributor to the Canadian economy was the housing market with strong growth in renovation activity (Thanks to gov't tax break incentives) and new homebuilding in the second half of 2009. Much of the rebound in Consumer spending is also linked to the Canadian housing market. The housing market will continue to grow supported by the rock bottom interest rate and improvement in both labor market and consumer spending. As mentioned earlier some risk remains as to when government support will expire.It is projected the interest rate will remain at the current low level until mid 2010 and its not until 2011 the tightening effect in the economy will be felt.

Crouching Yuan

When president Barack Obama visited Asia last month his fans were disappointed to find out he couldn’t make as much noise as he usually does with his oratory skills and larger than life appearance at home. Keeping in line with his western allies such as Jean Claut Trichet of European central bank and Dominic Strauss Kahn of IMF, Barack Obama pointed out to Chinese president Hu about the importance of a free floating Chinese currency. Mr Hu Jintao politely told all of them to go "Eff yourself". Western world argue that appreciating chinese yuan will help rebalance Americas trade deficit which in turn will help rebalance the worlds trade deficit. Also a stronger Yuan will help Chinese GDP to be less dependant on export and more dependent on consumption as Chinese consumers will find both national goods and foriegn goods less expensive with a stronger Yuan. If appreciating the Yuan is good for China and the world, Why is China restraining the free float of the Yuan? First reason is its not true that Chinese Yuan has not appreciated since the great recession. Since the start of 2008, the yuan has actually risen against every currency except the yen. China is also slowly rebalancing their economy as the consumption has contributed to 12% growth in GDP this year while the export fell by 4% points. China agrees that Yuan needs to be appreciated but over the long term with a slow pace. China argues that if Yuan is appreciated rapidly in the short term, the domestic economy that is still hugely dependant on export, will wipe out many players in the export market causing unemployment in China to go up. Secondly the benefits to Americans from appreciating Chinese Yuan is exaggerated. There is a little overlap between American and Chinese production so American goods could not simply replace Chinese imports. This will cause American consumers to pay more for Chinese imports which would be like imposing a marginal tax to American consumers. Nevertheless it is true that appreciating the Yuan will help the Chinese and the global economy. With massive Chinese population the Yuan appreciation will help reduce the price of foreign export boosting up the domestic Chinese demand. Basically China needs to save less and spend more so China can stop buying huge amount of American treasury bills with their saved money. In the medium term it will happen but not in the short term. Patience Mr President.